Question

Collapse Ltd has severe financial problems and has agreed with its creditors that its activities will be placed in the hands of XYZ Chartered Accountants, which has been appointed to govern the financial and operating policies of the organisation. Explain whether XYZ Chartered Accountants needs to prepare consolidated financial statements, which include those of Collapse Ltd.

Answer 1

Answer

IFRS 10 Consolidated Financial Statements outlines the requirements for the preparation and presentation of consolidated financial statements, requiring entities to consolidate entities it controls. Control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee.

The objective of IFRS 10 is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities.

The Standard:

• requires a parent entity (an entity that controls one or more other entities) to present consolidated financial statements
• defines the principle of control, and establishes control as the basis for consolidation
• set out how to apply the principle of control to identify whether an investor controls an investee and therefore must consolidate the investee
• sets out the accounting requirements for the preparation of consolidated financial statements
• defines an investment entity and sets out an exception to consolidating particular subsidiaries of an investment entity*.

A parent prepares consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances.

However, a parent need not present consolidated financial statements if it meets all of the following conditions:

• it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements
• its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets)
• it did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organization to issue any class of instruments in a public market, and
• it's ultimate or any intermediate parent of the parent produces financial statements available for public use that comply with IFRSs, in which subsidiaries are consolidated or are measured at fair value through profit or loss by IFRS 10.*

Here, in this case, XYZ Chartered Accountants does not want to prepare consolidated financial statements of Collapse Ltd, because there is only one company.